The Exits

The earnings love-in rolls on, with another sea of green "beats" on the old Bloomberg earnings report monitor. More than 76% of companies reporting thus far have met or exceeded EPS estimates, a higher than usual ratio. This, in turn, has led to a flurry of upgrades and a "race to the top" which has even sucked in some of the top-down strategists.

A slight cause for pause is the fact the top-line revenues have been less impressive. Indeed, less than half of companies reporting this far have met or exceeded revenue forecasts. Now, perhaps this is indicative of a healthy degree of operating leverage in corporate America, or that ruthless cost-cutting is payind dividends. Then again, it could just mean that they are lying moe than usual to massage headline EPS figures through consensus. The reality probably involves a bit of both.

Regardless, attention switches back to the macro today, with Bernanke's testimony in front of Congress. He set out his stall in today's WSJ, sketching out how the Fed's exit strategy will work while stressing that it is far from imminent. No doubt more will emerge from the prepared remarks and especially the Q&A, but BB has probably defused a worst-case outcome by getting his thoughts out in the paper.

Perhaps more interesting than anything that the Fed can say or do have been the first rumblings of an exit strategy from the Chinese. The head of the China Banking Regulatory Commission noted that strong risk mangement will be required from China's banks in the wake of the orgy of fresh lending in H1.

While trailing NPL data looks healthy for China's banks, as does provisioning, it is probably safe to assume that it's too early for some of the recent loans to go bad. But have a read of Michael Pettis's latest post; it doesn't bode particularly well for the returns on huge swathes of real estate investment.

At the same time, it's worth commenting again on just how substantial China's money creation has been; by Macro Man's calculations, over the past year, Chinese M2 growth (in dollar terms) has exceeded that of the US, Eurozone, Japan, and UK....combined.Now that the recovery is in place and the stock market's recovered, perhaps the authorities will turn an eye to mitigating the inflation and NPL threats that loom on the horizon. If they do, it could provide a nasty hiccup to Chinese equities.

Of more immediate concern to local punters is the looming in full solar eclipse in China tomorrow. Known locally as (Macro Man's not making this up) "sky dog eat the dragon's eye", it is traditonally associated with bad news....riots, famines, political upheaval, etc. Evidently, one onshore house is forecasting that the ol' sky dog will bring with it a secular bear market to the Shanghai Comp.

There you go, ladies and gentlemen, there's the lynchpin of your global economic and market recovery. Out-of-control bank lending and real estate speculation cannot put a dent in Chinese equities, but a "sky dog" can generate a secular reversal in trend. Good luck with that....

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Geez, MM, you are really out there today.."lying more than usual" "rumblings of an exit strategy" "sky dogs bringing down the market.

I just have one question about your chart on M2. my eyes maybe fooling me, but you said RMB M2 growth exceeds the combined M2 of the other 4 currences "combined",but as i look at the chart, it doesnt quite show that does it? can you recite the schedule of the numbers? not doubting you, but the chart doesnt show up well and would like to check your numbers.

Macro Man, when I started working under the head prop trader at a large German bank's credit/CB operations the guy was using moon charts and insisted I learn about Chinese astrology. Once again, do not expect too much from the Chinese punter viz a viz sensible behavior.

Europe hasn't released money supply data for June yet (which you can see by the red line.) When it does, barring a shocking increase (which may be in the realm of possibility giben the LTRO), Chinese money growth (which surged in June) will have overtaken the combined G4 growth.

I personally give it zero stock, though if the Chinese are going to whack the 'Comp on it then it's worth at least observing from afar. Selling European equities on it, as I tried this morning after a late-session dump in Shanghai, is NOT the thing to do.

It (MOFCOM) will subsidize 50% of the upfront costs for grid connected solar systems (the bulk of demand) and 70% for off-grid. They point to a 500 MW Floor for the next 2 or 3 yrs - and no cap is included. (Everybody has been waiting to see what the cap would be.)

Lots of companies have managed to beat down earnings expectations, and then they "beat" those reduced expectations? That says a lot more about Wall Street analysts than it does about corporate earnings

And since revenue was flat and all the gains came from "cost cuts" -- why don't we just raise unemployment to 99% ??? (the CEO still needs to get paid millions for the leadership displayed in firing thousands of people)

Corporate earnings would soar!

Sorry for the sarcasm. I didn't believe the sky was really falling last March -- and I don't believe this "earnings" nonsense either

You can still buy sovereign 5yr CDS at around 70 bps, SOE banks at not much more. I remember after a trip to Kazakhstan as a junior analyst in early 2007 making a massive fuss to get a previous employer to ditch their Kazakh bank paper and in turn pissing off a bunch of carry monkey PMs. All I can say is that this is much bigger and is going to be much worse political stability wise when it unravels unless they tighten soon.

For followers of Dow Theory, we closed yesterday in touching distance of confirming the first US equity bull-market in a couple of years. Interesting to note, that while the DOW is trading up today, transports are trading lower, thereby looking like they will firmly reject that idea.

I guess this is just another instance of stock prices driving earnings--if you are an executive at a S&P company you need to show "improvement" this quarter, and God knows it's easy enough to do that with earnings (a little harder with revenue--and besides, with lower revenue you don't need to pay the salesmen). With the writeoffs that could be taken in 2008Q4 and 2009Q1 (one-timers, wink, wink) there should be plenty of stuff in the cookie jar. . .

That’s a little worrying. How can the Chinese government grow the money supply, keep interest rates down and maintain the peg to the US dollar all at the same time? Shouldn’t the RMB shoot up against the USD?

No - its assumed their reserves are ok to cover everything but its quite likely that once all is said and done they will not have much reserves left after all the negative NPV projects, SOE bailouts, and banking sector recaps are done with. Its amazing how much capital is being destroyed by governments globally these days.